Some investors rely on a registered representative or broker at a wire house to handle investing in securities. The broker may charge a fee to the investor for the services the broker performs, or may receive a commission and/or other fees from the mutual fund or manager of a security the broker has purchased.
The wire house handles administrative functions for the broker, and receives a portion of the fees described above. The administrative functions can include clearing and settlement of trades; custody of securities; legally required supervision of the broker, including monitoring activities of the broker for compliance with securities laws; and review of trades proposed by the broker for suitability with the investment objectives of the investors affected. Wire houses also perform marketing functions for the brokers, helping to bring new clients to the broker.
If a broker seeks to operate in a more independent fashion, or becomes dissatisfied with the wire house, one option for the broker is to move to another firm. However, if the broker does not require the marketing functions provided by a wire house, for example, because the broker has a sufficient number of clients, or wishes to perform the marketing functions himself, the broker may not wish to move to another wire house. Smaller wire houses may take a smaller fee and perform fewer marketing functions, but the services that they do provide may be less than the current state of the art, so many former brokers of wire houses do not wish to work for them.
Other companies provide state of the art facilities, but only for a portion of the market. For example, independent broker-dealers allow registered representatives to associate with them, and can perform certain supervisory roles to allow the broker leaving a wire house to continue to sell securities in a commission based environment, but the set of mutual funds that brokers can sell for continuing compensation, and the tools they provide for selecting such funds, may be limited. Fee-only brokerages may provide a wider array of funds and selection tools, but they may not be able to provide the supervisory functions a broker requires to make commission originated investments under the securities laws.
Brokers may be additionally reluctant to move from a wire house because they do not want to give up the stream of income that ongoing transaction and other fees may generate from assets they have purchased for their clients.
What is needed is a system and method for a broker that can allow the broker access to the products, services, and tools of a fee-only broker/custodian, but provides supervisory functions for the broker, and allows ongoing service fees to be received by the broker without the amount of fees that are taken by a conventional wire house.